How Deferred Consideration Simplifies Property Financing

How Deferred Consideration Simplifies Property Financing What do we mean by ‘deferred consideration’? Deferred consideration is a financial arrangement commonly used in building development projects and real estate transactions. It refers to a portion of the purchase price or payment that is scheduled to be paid at a later date, rather than upfront. This mechanism […]

October 7th, 2024

How Deferred Consideration Simplifies Property Financing

What do we mean by ‘deferred consideration’?

Deferred consideration is a financial arrangement commonly used in building development projects and real estate transactions. It refers to a portion of the purchase price or payment that is scheduled to be paid at a later date, rather than upfront. This mechanism allows parties involved—such as buyers, sellers, developers, investors, and contractors—to structure payments in a way that aligns with project milestones, performance outcomes, or specific conditions being met.

We were recently approached by a developer who was looking to purchase a piece of land with planning for a new detached property. The exisitng parcel of land was being hived off a garden plot. An agreement was made whereby the developer would acquire the land, complete the build and then pay the vendor on exit an amount of the purchase price plus 20% of any sale value over £450k.

For the developer is reduced their capital outlay on day one. For the vendor they got the purchase price they wanted and an uplift via a cut of the GDV (gross development value).

Financing Developments With Deferred Consideration

For some lenders this type of structure can cause a problem. The main issue some lenders have is:

over the security the vendor wants in terms of comfort for giving up ownership
joint ownership of the land with the vendor not wanting to be tied to the development lending
that the developer has no cash risk on day one with the development lender having all the cash risk

If we remember that this type of purchase structure makes sense to the vendor and developer then it has to also make sense to some lenders.

When this type of structure arises then the following is key:

ensuring the purchase contract is clear about who owns what, pays what and does what
allows the vendor to have a second charge on the land so they can recover what they can in the event the developer fails
proving that the GDV is sufficient and can be supported at a level that allows the lender comfort even after a percentage is paid away

There are some really good development finance options for this type of development and with more modern construction methods meaning quicker completion of builds it is likely we will see more of this type of deal.

For smaller developers deferred consideration deals represent a way to start their own ground up developments without needing a huge capital outlay.

For more info on how we help finance these deals then get in touch.

By Dave Farmer

David Farmer

Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.